The Greek debt crisis is, ultimately, a story about the European Union and the euro that binds its member states in a straitjacket of currency and monetary policy. But what if the euro doesn't last the year? What if it doesn't last the summer?
Reuters blogger Felix Salmon plays Nostradamus on BBC Radio 4, narrating the fateful end of the euro -- from the future date of August 2010 -- over a soundtrack of war drums, wolf howls, thunder cracks and women screaming (the future of Europe sounds a lot like Bram Stoker's Dracula).
In short, the (hyperbolic, but instructive nonetheless) vision goes like so: Germany tries to stop the contagion of Greek debt with a $500 billion bailout fund, the people reject it, and Greece, Spain, Portugal, Italy, and ultimately France decide to go it alone on a new currency -- the Neuro. The amounts to default -- massive default. The Neuro initially trades around 75 Euro cents, and Europe returns to a system of multiple floating currencies.
The radio segment ends there, but future prescient installments might highlight the impact of massive default on the continent. The F-PIGS zone would be subject to massive bank runs as depositors freaked about their checking accounts facing 25% devaluation. The defaults would ricochet throughout the European banking system. Much of the defaulted loans are held by other European banks, which means when one country's government defaults, another country's banking system totters, requiring its government to spend itself deeper into deficit to save its financial system. In the long run, multiple currencies might make sense for Europe. In the short run, the continent would be lucky to experience only a short double-dip recession.